foxex: No Bounce

The Market Sum | INVESTOPEDIA

Insight after the bell

By Caleb Silver, Editor in Chief

Tuesday's headlines

1. Stocks fail to rebound after Monday's rout

2. Chart of the day- Small caps on the verge of a 'death cross'

Markets Close

Dow
25,286.49 -.4%

S&P
2,722.18 -.15%

Nasdaq
7,200.88 0.00%

VIX
20.50 +.24%

Bitcoin*
6,382.42 -0.20%

EUR/USD*
1.1285 +0.5%

*Currency markets and Bitcoin trade 24 hours, the figures here indicate movements between 9am and 4pm ET

#1 Stocks fail to rebound after Monday's rout

What started as a promising rally this morning on the heels of a strong earnings report from Home Depot fizzled into another day in the red for the DJIA and S&P 500. The Nasdaq was flat. Double-talk out of the White House on the progress or lack of progress with China on trade just confused everyone since both countries seem pretty dug in. The G20 Meetings in Argentina are coming up at the end of the month, so China and the U.S. may just be dancing this tango until the summit.

Absent any catalysts to inspire institutional investors to start buying again, they chose to sell. No news is good enough these days. These things happen in markets. Still, there is still a fair amount of optimism among individual investors like us.

Schwab surveyed 150 clients on how they feel about the markets post midterms and the consensus was generally positive. Here's what they said:

A majority (63%) of clients feel bullish about the market, while 37% feel bearish and think the market is due for a significant correction.
A third of clients (32%) don't plan to make any changes to their portfolio before the end of the year, and 29% percent plan to rebalance.
Nearly all (92%) view volatility as par for the course. More than half (53%) see it as a buying opportunity, while only 17% say volatility makes them nervous enough to move into conservative investments.
Most clients (79%) say the midterm elections have no impact on their confidence in reaching their long-term financial goals.

Why it Matters: To be sure, it's only 150 clients, so not a huge sample size. That said, Schwab manages $1.6 trillion of our assets, so they have a pretty good thermometer on the investing public. They run reliable surveys and these results are not surprising. Most investors don't obsessively check the markets and their returns daily, weekly, or even quarterly. That's probably a good thing. The less you check and the more you adhere to rules based investing that is tied to your goals and risk tolerance, the better you will sleep at night. Professionals check the markets all the time. That's their job. Only a select few are smart enough to do something with that information to capitalize on it.

Jack Bogle, the legendary founder of Vanguard and creator of the first index fund, preaches that we should 'set it and forget it.' Check your portfolio and your allocations every year, once a year, but let the magic of compounding do its work as long as you are in cheap index funds where you are not paying excess fees for management or advertising. Listen to Jack's advice in our interview with him.

What's Next: As we mentioned yesterday, the end of the year can bring a lot of selling as investors look to either lock in gains or take losses for tax purposes. There is also a lot of rebalancing happening as investors reposition for the new year. We have already seen some big sector rotations at the macro level: Growth to value, stocks and bonds to cash or other securities, etc. Some of this is just seasonal, but a lot of it is based on investor sentiment and growth expectations. The mighty tech stocks have fallen, but they are still the biggest kids on the block and have a lot of influence on how the overall markets move. Meanwhile, small cap stocks continue their downward spiral and are entering the dreaded 'Death Cross' in technical analysis parlance. See James's Chart of the Day Below.

In other news….

Amazon's New Homes: How NYC and Northern Virginia landed the Giant
Apple downgraded by Goldman over fear of slowing sales
Brexit deal causes the Pound to soar
The riskiest stocks may lead the next rally
Goldman Sachs shares seen falling 33% from highs
Why Boeing's stock may fall as earnings estimates rise
Crude oil futures continue to slide deeper into Bear Territory: CNBC
Big Bonuses coming to Wall St this year

Chart of the Day: Small caps on the verge of a 'death cross'

Something is happening with small cap stocks that has not occurred since September 2015. The Russell 2000 benchmark index, which represents stocks that have a relatively small market capitalization (generally defined as between $300 million and $2 billion in market cap), is on the verge of what technical analysts call a 'death cross'. This simply means that the 50-day moving average of the Russell 2000 index has converged with the 200-day moving average to the downside, and could potentially cross over if the index drops further.

Why is this important? First, a death cross is one of the more important technical analysis indicators for providing clues as to possible future direction. And as the name suggests, this pattern is ominously bearish. Technical analysts consider it one of the most negative and severe signals, especially since it doesn't happen all too often for the major stock indexes.

Second, although those other benchmark indexes – the Dow, S&P 500, and Nasdaq – are currently far from forming death crosses of their own, the small cap Russell 2000 is often seen as a leading indicator for the rest of the market. Where the small caps go, the large cap indexes are often expected to follow, so this clearly does not bode well for the entire market.

Does this mean that a larger correction or even a crash may be coming? While it probably won't happen just yet, there are increasing signs that market structure may possibly be in the midst of deteriorating, and investors should be even more wary than usual.